It has been a busy week for the launch of indices and synthetic currencies, which points to plenty of vibrancy in the market. I thought Mansoor Mohi-uddin, UBS’s head of FX strategy, was going a bit far in predicting average daily volumes in the FX market of $10 trillion by 2020, but I can’t deny that it feels like the market is expanding very rapidly at times. If Mansoor is including the use of products such as these in his figures, he might not be too wide of the mark:
FRB10 series launched by FTSE
In September 2009 FTSE launched its currency FRB5 indices (featuring USD, EUR, JPY, GBP and CHF). This must have been deemed a success because this week saw the launch of the FRB10 series, featuring AUD, CAD, CHF, EUR, GBP, NOK, NZD, SEK, JPY and USD.
FRB stands for Forward Rate Bias – the carry trade to you and me – and the index series measures (and captures, if you invest in a vehicle based on the index) FX beta derived from systematically buying the higher yielding currency in any currency pair.
The exact procedure is: for any pair, buy the higher yielder and sell the lower, value one month outright. The positions are rolled until the interest rate differential reverses. For the FRB5 series, this meant 10 trades were required for replication; for the FRB10 series, 45 are required.
As with the FRB5 series, FTSE have partnered with Record Currency management in the production of FRB10. Confirming most academic literature, Record has observed, using data from the past 30 years, that “FRB is capable of creating a fundamental and sustainable return stream that rewards the risks associated with holding higher interest-rate currencies.”
BNPP/OAM Wealth Preservation Currency Index
This product, launched jointly by BNP Paribas and Overlay Asset Management – and helpfully abbreviated to WPCI – is said to “offer investors access to a ‘virtual world reserve currency’ and will help preserve the purchasing power of currency allocations.”
There are similarities with the world currency unit. Wocu is based on the 20 largest currencies by GDP, whereas WPCI is based on the largest 15. However, WPCI then adjusts the GDP weightings according to purchasing power parity. Apparently this “boosts the weight of emerging market currencies.” Hélie d’Hautefort, Overlay Asset Management’s CIO, says: “The relatively high allocation to emerging market currencies – currently 40% of the index – taps into their superior growth potential.”
BNP offers access to the index via capital markets products such as swaps and options, while Overlay Asset Management will provide WPCI overlays, funds and segregated mandates.
François Boisson, head of European institutional FX sales at BNP Paribas, says: “Investors have turned to global equities, bonds and commodities to hedge against a falling dollar but often neglect the large, liquid currency markets. We believe that by using products based on the Wealth Preservation Currency Index, investors will protect against future erosion in purchasing power caused by the fluctuation of individual currencies.”
Oyster ForExtra Yield EUR
This oyster has nothing to do with the blue plastic cards Londoners use to get about. It is a Ucits III fund launched by Swiss banking group SYZ & Co. Again, Oyster is another FX carry based product: this time the fund managers select “the five currencies having the best risk/return ratio, measured by the interest-rate differential with the euro, divided by the expected volatility. The fund’s assets are then invested with an equal weighting in these five currencies, via one-month forward foreign-exchange contracts or non-deliverable forwards”.
Currently the five currencies selected are the Brazilian real, the Indian rupee, the Polish zloty, the South African rand and the Turkish lira. The SYZ people have also “developed proprietary macro-economic filters that are activated in periods of turbulence in the financial markets”, which sounds prudent; but apparently the approach isn’t quite as systematic as it appears: “…if unforeseen events occur, the managers may at any time decide to liquidate the positions in a currency in the course of a month.” Institutional investors will want to find out exactly who these managers are before they weigh in.
Finally, a reminder…
…not that you will need one, but while we’re on the subject of synthetic currencies and the like: the SDR is due to be re-weighted at the end of this year.
